The Impact of the Trade War: Divergence in Chinese and U.S. Innovations in the Post-Conflict Era

Abstract: This paper studies the impact of the US–China trade war on the intensity and direction of innovation in China. Patent abstracts are decomposed into technical terms using textual analysis, allowing for a comparison of innovation directions between Chinese and US firms based on the similarity of these terms. It is found that greater exposure to US import tariffs reduces this similarity, particularly with more recent US patents. In addition, patent filings in China decline in response to higher US tariffs. To interpret these patterns, we develop a quantitative model in which firms endogenously allocate innovation efforts across product features (mapped to technical terms in patent abstracts) and choose their export strategies. The model quantifies the contribution of the demand channel, which explains 27% of the decline in China–US innovation similarity following tariff shocks. Furthermore, changes in innovation intensity and direction lead to a 3.5% reduction in Chinese firms’ exports by 2021, with shifts in direction alone accounting for 0.5% of the decline.